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7 November 2019, Gateway House

Goodbye, RCEP

There have been mixed reactions to India’s not signing on to the Regional Comprehensive Economic Partnership. India is often criticised for abstaining from trade agreements and being a protectionist nation, but in fact, the reverse is true. The country’s trade to GDP ratio of 43% is higher than China’s 38% and the U.S.’ 27%. This shows how important trade is for India, particularly if it wants to reach the 2024 goal of being a $5- trillion economy.

Chief Executive Officer and Director, Research and Analysis

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On November 4, 2019 India announced it would not join the Regional Comprehensive Economic Partnership (RCEP), a free-trade agreement (FTA) between the 10 ASEAN member countries and six of its free trade agreement-partner countries.

India’s position is significant for many reasons.

First, RCEP was the only mega-regional trade agreement that India has been negotiating. Given the long queue of countries waiting to sign an FTA with India, the RCEP would have been a tutorial for the country, which has had less successful outcomes with existing FTAs.

Second, within India, concerns about not benefiting from trade agreements have been rising for several years. The highest FTA utilisation (total benefits signed in FTAs used by industry for exports) achieved was 25%, and the least being just 5%[1]. In contrast, the FTA partner countries with which India has agreements –  Japan, Korea, the Association of South East Asian Nations – leveraged their side of the FTAs to boost their own exports. Here too, some products that led to an increase in trade deficit, such as imports of palm oil, tea and coffee, are excluded from the FTAs. This made stakeholders in India, from industry, farmers and government, sceptical of the benefits of yet another FTA.

This was not so in 2014, when RCEP negotiations first began with enthusiasm. It was viewed as an opportunity to plug into the evolving global value chains. The competence of Indian industry was rising and there was economic optimism with the new Narendra Modi government in power. For the others, RCEP was a device to access India’s large market.

That was also the time when two other mega-regional trade agreements were under negotiation – the Trans-Pacific Partnership (TPP) led by the U.S. and the Trans-Atlantic Trade and Investment Partnership (TTIP) between the European Union and the U.S. – from which both India and China were excluded.  Therefore, there was genuine eagerness in India to join with the RCEP.

But by the time the 3rd RCEP Summit in Bangkok rolled around in November 2019, there was not a single, visible, constituency in India supporting the agreement – not the farmer nor the manufacturer. The Swadeshi Jagran Manch, an economic affiliate of the social organisation, Rashtriya Swayamsevak Sangh (RSS), and the sitting BJP government, an ardent activist which favours self-reliance and is against economic imperialism, announced a 10-day nationwide protest. The farmers’ unions, such as the All India Kisan Sangharsh Coordination Committee (AIKSCC), led several protests across the country. Even India’s biggest industry chamber, the Confederation of Indian Industry (CII), opposed signing the FTA.

Reflecting this, the Indian Commerce Minister Piyush Goyal[2] added the government’s own concerns, such as:

  • the Indian market being flooded with Chinese goods;
  • unfair non-tariff barriers that restrict Indian exports;
  • lack of reciprocity in the services trade;
  • weak rules of origin, use of a lagging 2014 base rate for duties (instead of the current 2019 rates);
  • discomfort with the ‘rachet’ obligations that do not allow a revision of tariffs once set;
  • extending a sophisticated investor-state dispute settlement mechanism to local governments like panchayats and municipal bodies , where India is institutionally weak; and
  • the automatic provision of Most Favoured Nation (MFN) status to those countries with which India does not have an FTA

What’s next? The October 25 report of the High-Level Advisory Group (HLAG) on Trade[3], established by the Ministry of Commerce & Industry, has made specific recommendations for domestic reforms and improving industry competitiveness. It includes macro-recommendations, most specifically in financial and agricultural liberalisation, which, once implemented, will ready India for global trade agreements to its advantage. Key recommendations include: supplementing the EXIM Bank of India with an additional Rs. 22,000 crores to support exports and the launch of Elephant Bonds for infrastructure.  There are also sector-specific recommendations, such as encouraging Foreign Direct Investment (FDI) in the agro-processing sector and simplifying the medical visa regime.

India is often criticised for being a protectionist nation, but in fact, the reverse is true. The country’s trade to GDP ratio of 43%[4] is higher than China’s 38% and the U.S.’ 27%. This shows how important trade is for India, particularly if it wants to reach the 2024 goal of being a $5-trillion economy.

The most recognisable service export for India is in computer and software services which totalled $108.5 billion in 2018[5].  The U.S., Europe and Canada are the primary destinations, accounting for 85% of all software exports. Given that the services export area is a priority for the country, India’s proposal for a Trade Facilitation Agreement (TFA) in services[6] is particularly timely. There is an opportunity for India to push for service-related commitments in areas beyond IT, such as healthcare, where it has a comparative advantage.

A key priority for India now is accelerating domestic reform in sync with an evolving global trading system. The discourse in the global mainstream media focuses on the trade in goods – an outdated era, particularly as the global economy is now dominated by services, an area where India is advantaged. The emerging rules on services, standards, investments, intellectual property, e-commerce and investor-state dispute settlements, is where India should be vigilant and an active participant, particularly as India prepares for its 2022 Presidency of the G20.

Meanwhile, Commerce Minister Goyal has announced[7] India’s intention to negotiate broad bilateral FTAs with the U.S. and the EU, with their large markets. This will be a good learning ground for India with countries which also recognise the need for developing new rules for global trade that benefit their domestic constituencies and safeguard them from the onslaught of China’s state-owned enterprises.

Akshay Mathur is Director of Research, Gateway House.

Purvaja Modak is Researcher, Geoeconomic Studies Programme, Gateway House.

This article was exclusively written for Gateway House: Indian Council on Global Relations. You can read more exclusive content here.

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© Copyright 2019 Gateway House: Indian Council on Global Relations. All rights reserved. Any unauthorized copying or reproduction is strictly prohibited.

References

[1] Saraswat, V.K., Priya, Prachi and Ghosh, Anirudha, “A Note on Free Trade Agreements and their Costs”, Niti Aayog,

http://niti.gov.in/writereaddata/files/document_publication/FTA-NITI-FINAL.pdf

[2] Goyal, Piyush, “Commerce Minister Piyush Goyal’s detailed briefing on PM Modi’s RCEP Move”, Youtube, 5 November 2019, https://www.youtube.com/watch?v=we8EdbpOqBs

[3] High Level Advisory Group, “Report of the High Level Advisory Group”, Department of Commerce, Government of India, 12 September 2019

https://commerce.gov.in/writereaddata/uploadedfile/NTESCL637084602888237192_HLAG%20Report%20.pdf

[4] World Bank, “Trade (% of GDP)”, World Bank

https://data.worldbank.org/indicator/NE.TRD.GNFS.ZS

[5] Reserve Bank of India, “Survey on Computer Software & Information Technology Enabled Services (ITES) Exports: 2015-16″, Reserve Bank of India, 2016, <https://m.rbi.org.in/Scripts/BS_ViewBulletin.aspx?Id=16565>

[6] Press Information Bureau, “Concept Note on Trade Facilitation Agreement”, Ministry of Commerce and Industry, Government of India, 15 March 2017,

https://pib.gov.in/newsite/PrintRelease.aspx?relid=159258

[7] Press Information Bureau, “India exploring trade agreements with USA & EU; FTAs with Japan, Korea and ASEAN being reviewed; No trade agreements in a hurry says Piyush Goyal”, Ministry of Commerce & Industry, Government of India, 5 November 2019

https://pib.gov.in/PressReleseDetailm.aspx?PRID=1590538

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